..:: Insurance News & Views ::..

P & C T R E N D S
Independent Agency System Sees Market Gains
As agencies’ share of the market continues to grow,
so do future opportunities.

During 2004, the property-casualty market grew to $457.68 billion in direct written premium, with the overall market increasing by $20.69 billion. During this time, the independent agency system amassed a nearly $12 billion increase in production, nearly 60% of the national increase. The 2004 results reinforce the strong consumer and business acceptance of the independent agency and broker distribution model and its very real opportunities for growth.

This is the 10^th year the Big "I" has contracted with A.M. Best Company to supply it with year-end industry market share and company expense data so that the Big "I" could continue its annual assessment of the state of the independent agency system. All of the data in IIABA’s report comes from A.M. Best and is printed with its permission.

Again this year, research revealed that there are efficient companies using each type of distribution system. More importantly, efficient independent agency writers are able to deliver insurance just as cost effectively as the captive agent writers and many direct companies—in some cases, even more so.

Continuing the trend seen in the past several years, independent agents and brokers and their carriers were able to increase their personal lines market share slightly in 2004. Independent agents and brokers continue to control only slightly more than a third of this huge market, however. While current marketing trends makes it clear the direct companies will remain aggressive competitors for a share from both the captive agent writers and the independent agency companies, particularly in the $161 billion personal auto market, independent agencies should be experiencing their best opportunity in decades to continue to gain a much larger share of the market. Independent agencies have the advantage of their community connections to counter this competition, especially if they focus on personal lines as a separate profit center, and not merely as an accommodation.

The independent agency system continues to have a dominant position in commercial lines in many states and has done a good job holding onto this share for much of the past decade. The big variances among the states, however, indicate that there are many opportunities for independent agents and brokers to continue to grow their commercial lines share in a wide variety of commercial markets.

Even though growth in both commercial lines and personal lines is slowing from the growth of the past three years, independent agents and brokers are reaping a significant dividend from this growth. The larger the market share they have in a particular market, the larger the dividend they accrue. The growth in commercial and personal lines premium and market share in 2003 and 2004 resulted in $39.52 billion of new premium written by our distribution system. This fact speaks volumes about the continuing opportunities for today’s independent agents and brokers and the power of increasing one’s market share!

The 2004 study once again showed that there are market share winners and losers each year. Each competitor will seek to exploit the weaknesses of the others to capture a larger share of the market. In this environment, it is vital for independent agencies and brokers and their carriers to position themselves as aggressive competitors by making the needed investments in people, technology, branding, advertising and disciplined sales processes.

Big "I" members can obtain a copy of the full report on the Big "I" Virtual University . If you don't know your User ID or Password, e-mail your name and agency name and address to logon@iiaba.net. We will be happy to provide you with the necessary login information. For non-IIABA members, subscriptions to the Big "I" Virtual University are available. Please click here for information about obtaining a subscription.

O N T H E H I L L
Big “I” Supports Intangible Assets Bill
Legislation would help with sale or acquisition of agencies, assets.

The Big "I" strongly supports a bill introduced Wednesday in the House that would allow purchasers of eligible small businesses to write off as much as $5 million of acquired intangible assets over the course of a five-year period.

The bipartisan bill, H.R. 4960, the "Tax Fairness for Small Business Act," introduced by Chief Deputy Majority Whip Eric Cantor (R-Va.) and Rep. Earl Pomeroy (D-N.Dak.), also would allow purchasers to more accurately amortize intangible assets acquired through the purchase of small businesses and provide better liquidity to Main Street businesses.

These developments are of significant interest to independent insurance agencies, many of whom have an interest in selling their businesses or purchasing other agencies, and would greatly benefit them in these transactions.

"The Big ‘I’ has been a longtime proponent of common-sense tax reform on intangible assets acquired through the purchase of a small business," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "We and our members are very pleased that Chief Deputy Majority Whip Cantor and Congressman Pomeroy are moving forward to provide tax relief to Main Street America’s businessmen and businesswomen, and we thank them for their work on this issue."

Current law requires intangible assets to be depreciated over 15 years, even though these specific types of assets, such as customer lists, have much shorter shelf lives. In fact, experience has shown that these types of intangible assets have shelf lives closer to five years, while a "covenant not to compete" agreement is generally two to three years. The Big "I" consistently has supported shortening the depreciation schedule.

Since many small businesses are primarily ‘service’ businesses with significant intangible assets, the marketability and value of these businesses has been adversely affected by the unduly long write-offs that potential purchasers face. For these reasons, IIABA strongly supports legislation that will allow intangible assets of a small business to be amortized over a shorter time period that is more consistent with the true value of that asset. The legislation would allow the purchaser of an eligible small business (less than $5 million annual gross receipts) to write off as much as $5 million of intangibles over a five-year period, with the remainder of the asset to be depreciated over the 15-year schedule.

"Shortening the depreciation schedule would allow companies to amortize intangible assets more accurately after the purchase of a small business," says Brendan Reilly, Big "I" director of federal government relations. "A quicker depreciation schedule also would allow Main Street businesses to reinvest more cash in their operations."

If enacted, the bill will provide significant tax relief to small businesses across the nation. A quicker depreciation schedule also would allow small Main Street businesses to reinvest more cash in their operations. Most importantly, this legislation would encourage economic growth and development by allowing companies to more accurately amortize intangible assets acquired through the purchase of eligible small businesses.

O N T H E H I L L
Tort Costs Set New Record
Asbestos-related claims totaled more than $5 billion in 2004.

A study of U.S. tort costs shows that expenses associated with court cases have reached a record $260 billion, with asbestos-related costs remaining significant.

"The U.S. Tort Costs and Cross-Border Perspectives: 2005 Update," produced by the Tillinghast business of Towers Perrin, is the ninth such Tillinghast study produced since 1985.

Among its findings, the report shows that U.S. tort costs grew at a 5.9% rate in 2004, the most recent year studied, compared to 5.5% in 2003. While asbestos costs were less in 2004 than in 2001-2003, they still totaled $5 billion for the year.

"This study reiterates what independent insurance agents and brokers know only too well—that tort costs continue to rise at an alarming rate," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "There is great potential for asbestos claims ultimately to exceed $275 billion, and that is why the Big ‘I’ supports legislation to create an exclusive and definitive legal remedy for asbestos claims."

The U.S. Senate continues to study the Fairness in Asbestos Injury Resolution (FAIR) Act, S. 852, introduced by Senate Judiciary Chairman Arlen Specter (R-Pa.) and Ranking Member Patrick Leahy (D-Vt.). This legislation, also offered in the House of Representatives as H.R. 1360 by Rep. Mark Kirk (R-Ill.), would create a privately funded, federally administered trust fund to compensate asbestos exposure victims. But there is concern that these bills will not prevent definitively a return to the court system.

"We certainly commend Chairman Specter, Ranking Member Leahy, and Rep. Kirk for their efforts, but we remain concerned that this legislation lacks ironclad language that will end asbestos litigation," Symington says.

The Big "I" is more optimistic about other reasonable measures that would curb the asbestos litigation crisis such as H.R. 1957, the Asbestos Compensation Fairness Act of 2005, introduced by Rep. Chris Cannon (R-Utah), which utilizes "medical criteria" to properly screen truly sick victims of asbestos exposure. The Big "I" also supports similar language reflected in an amendment offered to S. 852 by Sen. John Cornyn (R-Texas).

Additionally, the Big "I" also strongly supports H.R. 420, the Lawsuit Abuse Reduction Act (LARA), introduced by Rep. Lamar Smith (R-Texas). The legislation creates a "loser pays" scenario that permits judges to order plaintiffs to reimburse reasonable litigation costs, including attorneys’ fees, as well as mandatory sanctions against parties filing frivolous lawsuits. H.R. 420 also addresses "forum shopping" by requiring that plaintiffs sue only where they live or were injured, or where the defendant's principal place of business is located. The legislation has passed the House of Representatives, but the Senate is yet to consider it.

"The legislation offered by Representatives Cannon and Smith, and the amendment offered by Senator Cornyn, all address important legal-reform issues by putting forth common-sense solutions," Symington says. "We will continue to advocate for these measures, which are crucial to meaningful legal reform in America."

Independent agents and brokers should periodically think about the trends that are most likely to affect their businesses’ future by asking: How do I identify the trends that have the highest degree of certainty? Do the trends create opportunities my agency can begin to take advantage of today, or do they represent threats that I should start preparing for now? What two or three things do my agency’s leaders all agree we "must do" today to meet these trends and continue to improve our business?

At a recent ACT meeting, noted technology futurist Daniel Burrus, author of "Technotrends," shared a methodology for distinguishing between "hard" and "soft" trends. "Hard" trends usually are driven by technological, demographic or legislative/regulatory changes that are permanent and often transform the reality with which we must deal. The emergence of the Internet, cell phones and globalization are good examples. These trends have changed our reality forever. We have the highest degree of certainty about "hard" trends, and they are the most important trends to consider when organizations are investing for the future.

There are two categories of "soft" trends. "Soft trends (1)" are apparent trends today, and we think they will continue to occur; they are not a certainty. "Soft trends (2)" are apparent today, but we do not think they will continue to occur in the future. The prediction of a continuing federal government budget surplus was a good example of a soft trend (2), upon which decisions should not have been based.

Burrus believes that technology will continue to transform our reality at an accelerating pace. The impact of these trends will continue to grow broader. Agencies will be able to interact with their systems from anywhere and will use several different types of devices (computers, PDAs, cell phones, etc.) to access the Internet and their systems. Computers will send and receive data to and from other computers in real-time virtually automatically and will query for additional information when needed to complete a transaction.

As a result, agencies will save an incredible amount of the time they currently spend securing rates and issuing policies, as well as handling customer servicing needs. Agents will be able to give consumers the immediate responses they expect and handle issues on a once-and-done basis. Agency staffs will be freed up to focus more attention on sales, cross marketing and providing customers with value added services.

These technology trends also will create challenges. Consumers increasingly will turn to the Internet as their first source to get information and be attracted to businesses that give them value-added services online. Competitors—both the direct companies and innovative agencies—will move to the next generation of Web sites that marry voice and video with graphics, enabling customers to access a customer service representative live over the Internet, as well as to see and talk to him/her through the computer.

Many independent agencies run the risk of ceding the Internet to competitors by not focusing on this area, at the very time the Web is becoming the "go to" resource for a large percentage of the public. It is important for agents to develop a Web site strategy and have a meaningful online presence.

Next week’s IN&V will tackle demographic trends and how they will impact independent agencies’ future.

Jeff Yates (jeff.yates@iiaba.net) is ACT’s executive director. This article reflects the views of the author and should not be construed as an official statement by ACT.

For whatever reason, some carriers are more willing to write business auto liability coverage under Symbols 2, 8 and 9 rather than Symbol 1. The Virtual University "Ask an Expert" service recently received a question from an agent whose BAP insurer insisted on Symbols 2, 8 and 9 saying that they were equivalent to Symbol 1. Are these essentially the same? In a word: no.

"We were discussing auto symbols. Specifically, is there any ‘real’ difference in coverage for an insured if auto symbol 2, 8 and 9 are used in lieu of auto symbol 1? Many agents have become almost dogmatic on getting auto Symbol 1 for their customers. We feel we may be doing a disservice in that it could, in effect, eliminate the use of a very good market, both price and AM Best rating wise. Thank you for your input."

This issue has been debated for years. While, in most cases, Symbols 2, 8 and 9 are effectively equivalent to Symbol 1 for liability coverage because Symbol 1 applies to "any auto," it is quite conceivable that a claim could happen that Symbol 1 would covered, but a combination of Symbols 2, 8 and 9 would not.

· It is somewhat analogous to the difference between "all risk" and named peril. Symbols 2, 8 and 9 are defined autos. Only those are covered. It is conceivable that the auto of a sub or independent contractor that is not owned or hired could be used in the insured's business and for which the insured could become vicariously liable. If a difference was not implied, why do we have the No. 1 symbol?

· There is a difference: vicarious liability. Symbol 1 covers any auto that gives rise to liability for the insured, including vehicles the insured has no control over, such as a sub’s employee’s car at a job site. Some underwriters say they don’t like Symbol 1 because the CGL covers this vicarious liability and this is duplicate coverage. The CGL may cover some of these claims, but the BAP coordinates with the CGL by stating (Other Insurance) that, if the company covers the claim under more than one form, the company will only owe the higher of the two limits. Also, give the changes in the 2004 CGL and 2006 BAP, the CGL will now pick up even fewer auto exposures.

· I would say the difference falls somewhere within the words "that are used in your business" in the Symbol 9 definition. Symbol 1 will cover a non-owned auto that is not used in "your" business, however strange such a claim might be.

· Here’s an actual scenario: Company A in Florida has some truck-tractors. It buys a new one and sells one of the old ones. Company B, from out of state, comes down and buys it. Money exchanges hands with a bill of sale, but title remains in the name of Company A until the vehicle reaches the destination point. On the way, Company B has an accident in the tractor and kills someone. The family sues everyone including Company A because its name is on the title. While Company A may not end up getting stuck with any liability, there is the cost of defense. Symbol 1 does the trick.

· There is an exclusion hidden in Symbol 8: borrowing a car from an employee. Say my company car breaks down and I borrow a fellow employee’s car for a business trip. The named insured gets sued for vicarious liability arising out of an accident. When Symbols 8 and 9 are analyzed, you can see the gap. Symbol 8 does not provide the Named Insured coverage for borrowing an employee’s car. Symbol 9 does not cover hired or borrowed. Symbol 1 would cover this claim.